ETFs and GBTC: A boost for the crypto space
Recently, the news that BlackRock, Bitwise, ARK, etc. are applying for Bitcoin spot ETFs from the SEC has caused the prices of BTC and Grayscale’s GBTC to rise sharply. If the Bitcoin ETF is approved, it will bring more traffic and funds to the crypto market. Compared with GBTC, ETF liquidity and price rivets will be better, and it will be more popular in the market. It is expected that in the second half of this year or early next year, a Bitcoin ETF will be approved for listing, coupled with expectations of interest rate cuts, the encryption market will also usher in prosperity.
BlackRock caused a stir in the market last week by proposing plans to launch a spot Bitcoin ETF. Then, cryptocurrency asset management company Bitwise resubmitted revised rules to accommodate its Bitcoin spot ETF plan. There are currently rumors that Fidelity, the world’s third largest asset management company, is considering acquiring Grayscale or applying for a Bitcoin spot ETF. These news prompted a sharp rise in the prices of BTC and GBTC.
What are ETF and Grayscale GBTC, and what are the differences?
ETF and GBTC (Grayscale Bitcoin Trust) are two different investment vehicles.
ETF (Exchange-Traded Fund) is an exchange-traded fund that can be listed and traded on an exchange like a stock. An ETF's shares represent a basket of stocks, bonds, commodities or other assets designed to track the performance of a specific index. The price of an ETF is usually closely related to its underlying index, and investors can gain exposure to the underlying asset portfolio by buying or selling ETF shares.
GBTC is a cryptocurrency investment trust issued by Grayscale Corporation. GBTC is designed to track the price performance of Bitcoin, but its structure is different from traditional ETFs. GBTC holders cannot directly redeem their Bitcoin holdings, but instead hold shares of GBTC, representing a corresponding proportion of Bitcoins. In addition, the supply of GBTC is limited, and investors need to sell their holdings on the secondary market to obtain liquidity.
Key differences:
ETFs can be bought and sold at any time and are closely linked to the price of the underlying index, while GBTC is relatively illiquid and can only be traded on the secondary market.
The shares of ETF directly represent investors’ positions in the underlying index, while the shares of GBTC represent the holder’s indirect interest in Bitcoin.
ETF fees are generally lower, while GBTC has management fees and a premium (GBTC may trade at a higher price than the net asset value of the Bitcoin held).
The impact of traditional financial giants applying for ETFs
It is expected that more institutions will join the race for a spot Bitcoin ETF after BlackRock and Bitwise submit their applications.
In April this year, Ark Invest and 21Shares re-applied for their spot Bitcoin ETF. Subsequently, Wisdomtree and Invesco also resubmitted applications for spot Bitcoin ETFs on June 21. According to Bloomberg analysts, other institutions that have previously applied for Bitcoin spot ETFs, such as VanEck, Valkyrie and Global X, may also reapply. As these institutions adopt new strategies or see an increased likelihood of SEC approval, it is important to be one of the first ETFs on the market, so a large number of applications is common.
If the ETF application is approved, traditional institutions and retail investors will have a more convenient channel to invest in BTC. It is expected that a large amount of OTC funds will enter the market and drive the price of BTC; if it is not approved, when the bull market is approaching, GBTC will still be an investment for ordinary retail investors in BTC. As an important channel, GBTC will have a long-term premium relative to BTC.
When a premium appears, what are the arbitrage opportunities for GBTC?
There are currently four common GBTC arbitrage models, namely cash loan arbitrage, physical loan arbitrage, share loan arbitrage and locked premium arbitrage:
Cash lending arbitrage: Investors use cash or Bitcoin to purchase GBTC shares and sell them in the secondary market after a 6-month lock-up period. However, it should be noted that falling Bitcoin prices will bring greater risks. Profitability is only possible when the price of GBTC is higher than the initial cost.
Physical lending arbitrage: Institutional investors borrow Bitcoin from the lending platform and hand it over to Grayscale to exchange for primary market share. After the six-month lock-up period, the shares will be sold according to the opportunity, and the cash obtained will be used to purchase Bitcoin and return it to the lending platform. Arbitrage profit is equal to the selling premium minus interest and other expenses.
GBTC share loan arbitrage: Investors directly borrow GBTC shares and sell them in the secondary market at the right time. At the same time, use cash or Bitcoin to purchase GBTC shares to pay off the borrowed GBTC shares. This arbitrage method includes GBTC’s borrowing costs and a 2% custody fee. Profitability is only possible when the GBTC premium income exceeds the sum of these two fees.
Lock-in premium arbitrage: Investors use cash or Bitcoin to purchase GBTC shares, and use OTC transactions to borrow GBTC and conduct short transactions when the market price of GBTC is higher than the net asset value. Regardless of whether the price of GBTC rises or falls, the profit is fixed. The arbitrage return is the sum of the premium minus borrowing costs and custody fees.
These arbitrage strategies need to be treated with caution as market conditions and fees can have an impact on arbitrage returns. Investors should fully understand the relevant risks when executing these strategies and make decisions based on their own investment capabilities and market observations.
In short, Bitcoin ETF will bring more flow and funds to the crypto market. Compared with GBTC, the liquidity and price rivets will be better, and it will also be more popular in the market. It is expected that in the second half of this year or early next year, a Bitcoin ETF will be approved for listing, coupled with expectations of interest rate cuts, the encryption market will also usher in prosperity.